A crisis that defies comparison
It is often quite sensible to try to solve a current problem by comparing it to the past. What’s more, it’s human nature. Thus, we’ve been discussing how to deal with the novel coronavirus — its public health aspects, its economic fallout — by looking to past episodes. But when it comes to both questions, reasoning by analogy has its limits.
This virus is not like any of the other epidemiological threats that have emerged in recent decades; it is less fatal but much more contagious. Because of those two facts, it is going to affect our economy in ways that are unlike anything that anyone alive can remember. In terms of the scale of the response required, the closest analogy to what we’re facing is probably the Spanish flu epidemic of 1918.
Yet that still isn’t a very good comparison. The doctors of 1918 didn’t have the kind of supportive technologies we can now use to keep patients alive. Their problem was how to keep sick patients comfortable, warm and hydrated; ours is how to slow the spread of the virus enough so that no hospital runs out of ICU beds or ventilators.
This virus also isn’t much like any of the economic threats we’ve faced recently — or ever, really. While the globe has endured potential pandemics before, it’s never done so with such tight interlinkage among national economies — or such vulnerability to a virus that keeps attacking different links in the chain.
I’m worried that in the face of this unprecedented crisis, our economic policy-makers will likewise succumb to faulty analogies. Last week, the Federal Reserve lowered its target interest rates by half a percentage point, and people began talking about the kinds of fiscal policies used to stabilize the economy during the financial crisis. Stimulus! INFRASTRUCTURE!!!! On Monday, in a news conference about the virus, President Donald Trump mentioned a payroll tax cut.
I suppose these things can’t hurt. They’re the normal responses to normal recessionary shocks, when frightened consumers hunker down and try to conserve whatever they have, and in the process cause waves of unemployment that ultimately force many of them to spend down their hoards.
But I’m not sure that they can help, either. In past downturns, it may have helped to have the government serve as consumer and employer of last resort. But as retired economist Tony Lima pointed out on his blog, “It’s impossible to buy goods and services that do not exist.”
We can’t build infrastructure using quarantined workers. Reassured consumers can’t buy goods that haven’t been manufactured because a parts supplier in Wuhan, China, shut down. Laidoff hotel workers won’t benefit from a payroll tax cut. Lower interest rates won’t persuade people to travel at the risk of getting quarantined thousands of miles from home.
In the parlance of economists, we aren’t just facing a demand shock from people who have suddenly become afraid to fly or attend a concert. We’re facing a supply shock from things that haven’t been made in shuttered factories, that aren’t on ships to the factories and stores here that need them. If the epidemic grows in the United States, as many expect it to, the country will soon be facing another supply shock as quarantines and social- distancing measures prevent Americans from making some of the goods and services they would normally produce.
That doesn’t necessarily mean we’re facing a worse-than-normal recession, just a different kind. And it’s possible that when this is over, the economy may actually rebound more quickly than it would from a traditional recession. But in the interim, our problem won’t be reassuring people that they can afford to spend, but, rather, supporting existing firms and workers while local shutdowns test global supply chains, local quarantines restrict movement and local illness shrinks the workforce.
And to reason by metaphor, rather than analogy, suggesting traditional fiscal measures in the face of these novel shocks is like building a wooden man o’ war to fight the Second World War.
There will be a role for government economic policy in all this, and probably a big one. Economist John Cochrane suggests on his blog that we’ll need creative and closely targeted fiscal policy to help regions, businesses and individuals disproportionately impacted by the virus — from service workers living paycheque to paycheque to airlines.
Think of something much closer to the response to 9/ 11 than to 2008 — but with a key difference. After the twin towers fell, most people resumed their normal activities, apart from flying, very quickly. If COVID-19 gets bad in the United States, people may need to stay home for weeks, at least in some parts of the country. Designing a stimulus around that presents a unique challenge, and people including Cochrane are just beginning to think through the problem.
Cochrane, by the way, was a leading stimulus skeptic during the Great Recession. His current call for a stimulus should impress you twice: first, because it suggests how serious the problem is, and second, because it’s an example of the creative reasoning by non- analogy we’ll need in the months ahead.
THERE WILL BE A ROLE FOR GOVERNMENT ECONOMIC POLICY.